Saturday, June 9, 2012
Wise Economics: Development in Nepal
My latest article in Republica, published with the title "Wise Economics" on June 9th, deals with the hiccups in the development process in Nepal. The direct link to Republica's article is here. The unedited version is below.
Wise Economics
Economic growth in Nepal has not been across the board. Agriculture has
been languishing for decades. The Maoist conflict and lack of electricity
caused a further decline of agriculture, as well as manufacturing. Luckily,
education, construction and the newly rejuvenated banking sector have provided
a sense of normalcy and stability. However, there are still three basic hiccups
in the administration of development activities in Nepal.
First, our planning capacity is weak. There are many able and competent
planners at the national level. However, people with significant and competent
planning and implementation skills are in short-supply at the decentralized
level. Second, our fund flows are irregular. The central government allocates
funds for development, but it reaches the destination only after a few months.
In addition, funds vary drastically from one year to another, which confuses
the people working at the ground level.
Third, the absorptive capacity of development funds is very low. When
funds are distributed, there is a pre-condition attached with the fund,
especially regarding how and where it can be used. In some cases, funds are insufficient,
while in other instances, the funds could be in excess. In case of excess funds, such funds cannot be
diverted to other important causes due to the binding pre-condition attached
with the funds. Therefore, if the personnel at the ground feel that funds from
one program should be diverted to another more immediate need, they are unable
to do so. This causes the funds to go unused or distributed via corrupt
schemes.
While Nepal has made significant progress in defining and enforcing the
concept of property rights on public goods and resources, as is evidenced from
the success of community forestry, there are many areas where property rights
for environmental resources have not been well defined and enforced. Unused
land exist under the domain of the Nepal government in areas where famine and
hunger risks are persistent—for example, the far-west region. These should be
used in manners similar to community forestry so that people can use it for
income generation and food security purposes. Once that is successfully
implemented, the government should improve the transport infrastructure to
reduce the transaction costs of their produce or products. Increase in economic
activities and productions serve no purpose if access to market is difficult.
Speaking of economic activities, it has to be ensured that every player
in the market has equal odds of succeeding. One group of producers should not
be able to dominate the market and dictate the rules. Economists use the
Hirschman-Herfindahl Index to observe if any single producer or a group of
producers is unfairly dictating the terms in the market. For the Nepali
airlines industry, the “Hub and Spoke” observation could help us learn if
Buddha Airways, the largest airline in Nepal, is charging the highest price
simply due to the fact that it is the largest domestic airline. If this is
true, it hurts the consumers and the development process. Then, the government
needs to intervene.
However, government interventions are going to be trickier once Nepal gets
federalized. Some development concepts like Horizontal
equity rationale will continue to be discussed. It has greater appeal than
vertical equity because it ensures equity across different regions. In theory,
it ensures that equals are treated equally. However, even if federal states of
Nepal are considered equal by the constitution or any other mandate, it is
inevitable that some states will end up with richer endowment of natural or
other resources essential for development. Horizontal equity in that situation
is impossible although it is a desirable outcome.
Government interventions have to consider the resource argument, especially
because economic development rests on the shoulders of available resources. Residents
of Manang are killing residents from neighboring Gorkha district who came to
“steal” their yarchagumba. So, we cannot guarantee that violence over the
rights to a particular resource will not flare up when Nepal gets federalized.
In fact, it is only going to escalate. Despite these fights over natural
resources, development practitioners know that capital is the most important
resource because absence of capital renders other resources almost unusable.
On one hand, according to law of diminishing marginal returns, if
capital is taken to capital-deficit areas, i.e. poorer areas, the marginal
productivity of that capital will be higher than if it were invested in an
already prosperous area. This argument suggests that capital should go where
labor is abundant. An example of this is the miraculous growth of China where
favorable policies created by the government ensured that investors brought
their money and established factories because there was no shortage of cheap
labor in China.
On the other hand, poorer regions have low marginal as well as average
productivity. Therefore, moving capital and spending it in areas with low
productivity is wasteful because that capital could instead be used for
accomplishing significant economic growth in areas with higher productivity.
This argument suggests that labor should go where capital is abundant. The
movement of people from all over Nepal to urban areas and cities for jobs and
opportunities is an example.
However, this second economic thought overlooks the fact that urban
areas get larger and larger every passing year due to rural-urban migration to
capital rich areas. This phenomenon creates “urban giants” that often suffer
from stretched public service delivery scenarios where delivery of even
essential services becomes logistically a nightmare. Kathmandu has been suffering
from urban giantism for some time now. This approach to development is not
desirable.
Economies of agglomeration are useful in the sense that cities foster
economic growth due to proximity to jobs, labor, capital and infrastructure.
However, Nepali cities and urban areas are getting stretched to their
functioning limits. The right approach to development in Nepal is to take
capital to the rural and poorer areas where resources essential for economic
growth like land and labor are cheap and abundant.
Labels: development, economics, economy, federalism, urban giant
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